RPT-DEALTALK-Canadian cannabis producers set their sights high

Reuters Staff

6 Min Read

(Repeats story originally published overnight)

By John Tilak

TORONTO, June 13 (Reuters) - By unlocking the once-obscure medical marijuana market, Canada has created a fast-growing, profitable and federally regulated industry with a distinct appeal to the more daring global investor.

About a dozen producers of the drug will find themselves in the spotlight this year as they consider going public or prepare to so through share sales or reverse takeovers to capitalize on recent regulatory changes, investment bankers said.

The Canadian companies are in a race to raise money to build facilities, attract patients and grab shares in a market projected to grow to C$1.3 billion ($1.20 billion) in the next 10 years.

Despite facing considerable risks, they have the advantage of being in one of the few countries where medical marijuana is legal nationwide and where licensed operators can mass-produce it.

In the United States, the drug remains illegal at the federal level. Some 20 U.S. states have legalized medical marijuana, but investors worry about the prospect, however remote, that the federal government may strike down those laws.

Although the U.S. market is home to companies including Medical Marijuana Inc and Cannabis Science Inc , their northern counterparts are likely to benefit from greater legitimacy and legal clarity. Sources said much of the private equity investment in the Canadian industry had come from the United States.

“Canada is one of the few countries anywhere where its citizens have a constitutionally protected right to access medical marijuana with a physician’s consent,” said Paul Rosen, chief executive officer of PharmaCan, a holding company with large stakes in four producers. “And you’ve got the government trying to create an industry around it.”

Tweed Marijuana Inc, which converted an old chocolate factory into a marijuana farm, led the pack by becoming the first publicly held Canadian company in the sector. Its April offering was oversubscribed within 15 minutes of being announced, sources said.

Inspired by Tweed, PharmaCan plans a listing in the next month or so. Producers Organigram, Aphria and Bedrocan expect to go public in the next three months, while CannMedica and others are looking at doing so.

RISKS AND REWARDS

An April overhaul by regulator Health Canada has thrown the market open. More than 850 companies have applied for licenses to produce the drug, and 13 have obtained them so far.

“This is Health Canada’s realization that medical marijuana deserves to have a space in the treatment paradigm,” said Bloom Burton President Brian Bloom. “What they’re asking in return is that the standards of manufacturing, distribution and vigilance are similar to what is seen in the pharmaceutical industry.”

Analysts expect only a few major companies to remain standing a few years from now.

“The winners will be the ones that are going to have a strong brand, a strong customer acquisition strategy, and have the ability to scale up quickly,” said Jacob Securities analyst Khurram Malik.

Health Canada estimates the sector will grow tenfold in its first 10 years, reaching about 450,000 users and C$1.3 billion in sales.

Malik says that is only half of the market’s potential because the same number of people already use medical marijuana through the black market and Health Canada’s measures will bring greater access and lower prices.

“It’s an industry that has been born out of almost nothing, and it is moving very rapidly into something very large,” he said. “The flip side is you’re also going to have a lot of risk.”

Indeed, a list of risk factors takes up about half of the 22 pages in Tweed’s latest quarterly filing.

Potential industry pitfalls include legal changes, resistance from home growers suing for the right to keep producing their own pot and physicians who are not convinced about the drug’s benefits.

“We believe that there’s not enough evidence out there that shows us that we could use this product safely,” said Dr. Louis Hugo Francescutti, president of the Canadian Medical Association. “We’re actually being asked to authorize use of a product blindfolded.”

Michael Krestell, president of investment bank M Partners, says investors betting on the sector at this stage are looking for “high-risk, high-reward” opportunities.

He expects the planned offerings to be in the C$5 million to C$20 million range, with the companies valued at C$60 million to C$100 million.

Tweed, which has a market capitalization of $108 million, raised C$15 million when it went public through a reverse takeover of a listed entity.

Bankers expect most of the medical marijuana companies to take this approach since it is often faster and cheaper.

For despite the potential of the industry, its biggest challenge is to establish credibility among patients, doctors and more-cautious investors.

“I don’t care if we’re the biggest seller of medical marijuana in the first year or two,” said Aphria CEO Vic Neufeld, who previously led vitamin maker Jamieson Laboratories, “but I want to make sure that we are the most trusted.”